TABLE OF CONTENTS I. INTRODUCTION 76 II. MULTIPLE DERIVATIVE ACTIONS 79 A. Foss v. Harbottle 79 B. Holmes v. Camp 81 C. Waddington Ltd. v. Chan Chun Hoo Thomas 83 D. Universal Project Management Services Ltd. v. Fort Gilkicker Ltd. and Others 83 III. CHOICE OF LAW IN MULTIPLE DERIVATIVE ACTIONS 85 A. Which Country's Law? 86 1. The Law of the Place of Incorporation of the Subsidiary 90 2. The Law of the Place of Incorporation of the Parent Company 93 3. Both Laws of the Places of Incorporation 97 4. The Law with the Closest Connections 98 B. Substantive or Procedural? 103 1. All Procedural 104 2. Some Substantive, Some Procedural 106 3. All Substantive 111 a. United States 112 b. British Virgin Islands 114 c. Hong Kong 118 IV. CONCLUSION 119 I. INTRODUCTION
Do multiple derivative actions help minority shareholders in common law jurisdictions? The answer appears to be in the affirmative, particularly after the English Court of Appeal's decision in Universal Project Management Services Ltd. v. Fort Gilkicker Ltd. (1) In that case, for the first time in England, the court stated clearly that multiple derivative actions were allowed under English law. (2) Shareholders of holding companies can thus bring derivative actions on behalf of subsidiaries despite not owning shares directly at the subsidiary level. (3)
England is certainly not the first jurisdiction to recognize multiple derivative actions. In fact, multiple derivative actions have been recognized in the United States for more than a century, since Holmes v. Camp was decided in 1917. (4) Canada, Australia, New Zealand, Singapore, and Hong Kong had also recognized multiple derivative actions prior to Fort Gilkicker. (5) Still, Fort Gilkicker is expected to further promote multiple derivative actions in other common law jurisdictions, such as the British Virgin Islands (BVI), that have yet to explicitly recognize the device. (6)
The decision in Fort Gilkicker was no doubt driven by the potential injustice that might arise if multiple derivative actions were not allowed. Commenting on the lack of multiple derivative actions prior to Fort Gilkicker, Lord Millett said that had multiple derivative actions
come before an English court, the case must have been dismissed in limine, and for the first time for more than 150 years an alleged injustice would be without redress. The moral for would-be fraudsters is simple; choose an English company and be careful to defraud its subsidiary and not the company itself. (7) Having recognized multiple derivative actions, this loophole was closed by the court in Fort Gilkicker, which believed that English law must be more flexible to address the injustice. (8) This flexible approach is at the core of multiple derivative actions among common law jurisdictions. For example, the Supreme Court of Illinois explained that the multiple derivative action was essential because "a single derivative action on behalf of the subsidiary may only be maintained by a shareholder of record of the subsidiary...[and a] shareholder of record in the holding company would, therefore...be without remedy, even where...the holding company is the wrongdoer." (9)
Thus, England is developing its multiple derivative action regime along the lines of other Anglo-American jurisdictions by taking a more pragmatic approach to deal with the ever more complicated structure of corporate groups. This development is significant, especially taking into account the increasing use of special purpose vehicles set up in offshore tax havens. (10)
However, this pragmatic approach may meet problems in the international context when the multiple derivative action involves a foreign company and thus the inevitable issue of choice of law arises. For example, in a multiple derivative action where the parent company is incorporated in England but its subsidiary is incorporated in the British Virgin Islands, which country's law shall be the governing law? Should the English court apply the law of the place of incorporation of the parent (English law) or that of the subsidiary (BVI law)? Or should the court apply a third country's law? If the governing law bars or substantially limits multiple derivative actions, then the shareholder will not be able to make use of the device as in the purely domestic case. Apart from the question of the choice of law approach on the substantive law of a multiple derivative action, the court will also need to decide the characterization of different aspects of the multiple derivative action. Which aspects of the multiple derivative action should be characterized as substantive, and therefore be governed by the governing law? Which aspects of the multiple derivative action should be characterized as procedural, and therefore governed by the lex fori? These latter questions fall into the classic issue of characterization between substantive and procedural matters. (11)
These choice of law questions exist in a single derivative action but will be exacerbated in international multiple derivative actions. Common law jurisdictions have been inconsistent on these important questions. There are multiple conflicting approaches being applied by the US courts. (12) Other jurisdictions, like England, have yet to consider these questions in the context of multiple derivative actions. Nor have they attracted the attention of commentators. (13)
Recent English cases, particularly Novatrust Ltd. v. Kea Investments Ltd., suggest, however, that the English court will take a formalistic approach on these questions, which would be bad news for prospective minority shareholders. (14) In Novatrust, the English court held that the plaintiff shareholder of a BVI company must seek leave from the BVI court before initiating a derivative action in England, as required by BVI law, which was the law of the place of incorporation. (15) Since the plaintiff shareholder did not apply for such leave beforehand, its action was denied. (16) Although Novatrust was not a multiple derivative action, the rulings--namely (1) the mechanical application of the law of the place of incorporation to the derivative action and (2) treating the leave requirement as substantive rather than procedural--have set difficult roadblocks to multiple derivative actions in the future. (17) Considering that England is the latest common law jurisdiction to recognize multiple derivative actions and has yet to make a definite decision on the relevant choice of law approaches, it provides the best testing ground for the different choice of law approaches among common law jurisdictions.
This Article discusses how the formalistic choice of law rules will adversely impact the effectiveness of international multiple derivative actions by reviewing recent precedents from common law jurisdictions, most notably England, the United States, and Hong Kong. Comparison of the choice of law approaches among common law jurisdictions is particularly relevant as derivative actions and multiple derivative actions are both uniquely designed as shareholder protection devices in common law jurisdictions. (18) These jurisdictions have long been influencing one another in their developments in both derivative actions and conflict of laws.
As will be elaborated below, it is suggested that international multiple derivative actions call for a more pragmatic and flexible approach in regard to choice of law, just like the approach applied in Fort Gilkicker when the court recognized multiple derivative actions in a purely domestic case. More specifically, common law jurisdictions should make an exception to the application of the law of the place of incorporation and consider applying the law with the closest connections to an international multiple derivative action. They should also characterize the application for leave of a foreign court as a foreign procedural matter. In order to investigate the choice of law issues and proposals, Part II first tracks the development of multiple derivative actions in common law jurisdictions. Part III then examines the two choice of law issues and the potential approaches, respectively. Part IV concludes the Article.
MULTIPLE DERIVATIVE ACTIONS
The development of multiple derivative actions in common law jurisdictions can be traced to four landmark cases from England, the United States, and Hong Kong.
Foss v. Harbottle
Derivative actions first took root in common law as an exception to Foss v. Harbottle, an English case decided in 1843. (19) The general rule of Foss v. Harbottle is that the company, not the shareholders, is the proper plaintiff in claims for wrongs done to it. (20) This is sometimes referred to as the "proper plaintiff rule." (21) However, the court did recognize that there might be a need for an exception in appropriate cases for the interest of justice since "the claims of justice would be found superior to any difficulties arising out of technical rules respecting the mode in which corporations are required to sue." (22) The English court subsequently developed a number of exceptions, with the most notable one being the "fraud on the minority" exception. (23) Under this exception, a shareholder must satisfy two litigation conditions, namely (1) that a fraud, which is a wrong done to the company not the shareholder, has been perpetrated, and (2) that the company is controlled by the wrongdoers. (24) Then, "the rule is relaxed in favor of the aggrieved minority who are allowed to bring what is known as a minority shareholders' action on behalf of themselves and all others." (25) This exception is essential for the shareholders since otherwise "the wrongdoers themselves, being in control, would not allow the company to sue." (26)
Clearly, this is a pragmatic compromise to the formalistic concern of the separate legal personality of a corporation. (27) The court's willingness to inject flexibility is even more impressive given that Foss v. Harbottle was decided in...